Robert Grunnah Talks Land Sales, Rising Prices in a Dallas Business Journal Q&A

Land sales north of Dallas-Fort Worth are sizzling, with near-term developers and long-term speculators snatching large tracts in the path of projected growth as DFW continues its Manifest Destiny march to the Red River.

Hunt Realty Investments Inc., for example, recently bought a property known as Headquarters Ranch, a more than 2,500-acre site on Frisco’s northern edge and the largest contiguous land assemblage in the city. Hunt Realty will master-develop a massive, mixed-use project alongside the Karahan Cos., led by Fehmi Karahan, who was the driving force behind much of Plano’s Legacy area.

Further north, Younger Partners’ John St. Clair brokered the sale of more than 900 acres to an undisclosed family that has owned land around Texas for generations. The investors bought a 634-acre farm in Howe, about 55 miles north of Dallas, as well as a 371-acre parcel in Sherman, about 65 miles north of Dallas.

The Dallas Business Journal talked with Robert Grunnah, the leader of Dallas-based Younger Partners’ land investments division, to get a sense of who’s selling, who’s buying, for how much, and where. This interview with with Grunnah, who has 40-plus years of experience in the DFW land business, has been edited for brevity and clarity.

What trends are you seeing in terms of land sales to the north? Our long-term history has been to focus on the different cycles that have occurred and the different product types. Land has traditionally been slower (to rebound) in most of the recovery cycles than virtually any other asset. The reason is because it’s not income-producing.

How has this recovery cycle progressed? This has been one of the longest recovery cycles we’ve ever seen. Certainly of the four cycles I’ve experienced, it’s the longest by two or three years. Land has been much slower to recover. We started focusing in the 2009-2011 era on land up north, in the area west of Sherman-Denison and south of Lake Texoma. Land was trading in the $2,000 to $3,000 per acre price range for plain, raw land. It was not very active. There weren’t many trades. Most people were focused on income-producing properties for investment as opposed to land. It stagnated there up until about three or four years ago. But over the last 12 to 18 months, we’ve seen a distinct acceleration of values.

Why? I think it has a lot to do with the current income-producing or vertical asset market. We’re pricing it at two, three or four times replacement cost. Momentum for investment in those types of properties has finally worn thin. The competition for real estate investments in Dallas-Fort Worth has gotten so competitive and pricing has gotten egregiously high for vertical assets. People have decided that if they’ve got to park their money in real estate investment, land is the best opportunity.

So people are turning to raw land? Investment tracts are generally considered to be anything over 100 acres. This is for unimproved investment land that is not tied to any infrastructure nor will it be tied to any infrastructure in the near term. It’s vacant land that is in the path of growth, but is not expected to be absorbed for development anytime in the near term. You take the average 100-acre tract, and you go into the speculative marketplace for land of that nature, and you go north of Celina, you have Gunter, Dorchester, essentially Sherman and Denison. If you come back south again, you come back into Howe, Van Alstyne and Melissa and that area north. That’s really the speculative marketplace.

Why is DFW growing more rapidly northward than other directions? The natural growth pattern for most major cities in the United States is north. For the most part, Dallas-Fort Worth has grown north, and that’s partly because of the availability of sanitary sewer and water. When we first started selling land north of Fort Worth to Mr. Perot in 1985, ’86, ’87, it looked no different than north of Celina looks today. Now, look at what has occurred. That was created first because Mr. Perot had the vision and the resources to create the activity, and secondly because infrastructure was available. The city of Fort Worth jumped out and grabbed that.

What’s in high demand to the north? The demand north of Celina is for larger tracts. If you go into Cooke County, out of Grayson County, you’ve got some beautiful estates — horse farms and such — and those people will utilize it for secondary use, agricultural use, until there is demand pressure.

What trends are you seeing in pricing? There’s no quantitative method to value a piece of raw, speculative land like the 100 acres I’m talking about. What is it worth? Does it have impounded water on it? If yes, that’s more valuable. Does it have trees and creeks on it? If so, that’s more valuable. It’s priced more like a commodity. We’ve seen pure, speculative investment land go from $2,000 to $3,000 per acre five years ago to the $10,000 to $12,000 per acre range today. And there’s nothing that has changed. There’s no development on the property line. There’s not road going through the middle of it. There’s none of that. It’s just commodity-based pricing. It’s what people see as an investment. No one has ever lost money at any price level on buying 100 acres north of Celina, west of U.S. 75 and east of Interstate 35 at any price. All they have to do is be able to carry the land through the cycles, and at some point the cycle will exceed what they paid.

Even if they’re highly leveraged? A lot of people have gone broke up there because they’ve leveraged it and they were forced to pay debt service. One of the greatest advantages of land ownership today is that you have agricultural exemption. You can carry that land for nothing. And if you buy a nice enough piece of land, you can put cows on it, get your ag exemption, and make money. It’s income-producing land — a rare thing.

Can you tell me who made this latest purchase of 1,000 acres in Sherman and Howe? I can’t tell you who it is, but it’s a family that traces their roots in Texas back four or five generations. They have bought land in the path of growth for three or four of those generations. They buy it, they put cows on it, they hold it and wait until the market changes and growth gets to it. Then they sell it for a significantly higher price and go out further and buy more. It’s a classic investment strategy that doesn’t fail. But again, in order to make it profitable, you have to be in a position that you can carry it.You cannot be in a leveraged position or you’ll lose it. That’s what happened to so many people in the late ’80s and the 2008, ’09, 2010 era.

What are your thoughts on Hunt Realty Investments’ purchase of the Headquarters Ranch property in Frisco? It stands out as such a significant acquisition that you really can’t apply the standard investment procedures in that deal. They’re going to need to develop that land in order to make it work. I admire them because they’re going in at the peak of a market. But with the financial resources that the investor pool has, they can wait that out two more cycles, and they’ll have no concerns. They’ll do extremely well because of where it’s located. With the job growth and the job centers that are moving in that direction, it’s an absolute home run. It was a brilliant move.

Where is DFW’s northern frontier? It’s creeping up there. It’s further north than we’ve seen it. We’re north of U.S. 82 now, which is north of Denison-Sherman.

How is the extension of the Dallas North Tollway progressing? Everybody is still speculating on the extension of the toll road, and it’s just creeping along at a snail’s pace. But it will ultimately go all the way up to U.S. 82. In my lifetime, no. In your lifetime, probably not. But when you look at what people are paying for land today — $15 to $20 per square foot at the intersection of the toll road and 380, that’s wealth created by the toll road.